F2 M8 Ratio Analysis

Question 1

____ are measures of a firm’s short-term ability to pay maturing obligations.

Answer 1

Liquidity ratios

Question 2

In liquidity ratios, the higher the ratio the (higher/lower) the risk.

Answer 2

Lower

Question 3

What is the calculation for the Acid-Test (Quick) ratio?

Answer 3

(Cash + Cash Equivalents + Marketable securities + Net Receivables) / Current liabilities

Question 4

Trend analysis is comparing ____ to ____.

Answer 4

Current year to prior year

Question 5

Cross sectional analysis is comparing ____ to ____.

Answer 5

Our company information to the industry average

Question 6

What is the calculation for the Cash Ratio?

Answer 6

(Cash + Cash Equivalents + Marketable securities) / Current liabilities

Question 7

____ are measures of how effectively an enterprises is using its assets (turnover).

Answer 7

Activity ratios

Question 8

What is the calculation of the Accounts Receivable Turnover?

Answer 8

Net credit sales / Average net receivables

Average net receivables = (Prior year + Current Year) /2

Question 9

What is the calculation of Accounts Receivable Turnover in Days?

Answer 9

Average net receivables / (Net credit sales / 365)

Or 365 days / Receivable turnover

Question 10

What is the calculation of Inventory Turnover?

Answer 10

Cost of goods sold / Average inventory

Average Inventory = (Current year + Prior Year)/2

Question 11

Compared to the standard turnover, what would our company like our Accounts Receivable Turnover and Inventory Turnover to be? Greater than or less than?

Answer 11

Greater than

Question 12

Compared to the standard turnover, what would our company like our Accounts Receivable Turnover in Days and Inventory Turnover in days to be? Greater than or less than?

Answer 12

Less than

Question 13

What is the calculation of Inventory Turnover in Days?

Answer 13

Average inventory / (Cost of goods sold/365)

Or 365 days / Inventory turnover

Question 14

What is the calculation of the Operating Cycle?

Answer 14

AR turnover in days + Inventory turnover in days

Question 15

What is the calculation of Working Capital Turnover?

Answer 15

Sales / Average working capital

Question 16

What is the calculation of Total Asset Turnover?

Answer 16

Net sales / Average total assets

Question 17

The following financial ratios and calculations were based on information from Kohl Co.’s financial statements for the current year:
Accounts Receivable Turnover = 10
Total Assets Turnover = 2
Average Receivables during the year = $200,000
What was Kohl’s average total assets for the year?
A. $200,000
B. $1,000,000
C. $2,000,000
D. $400,000

Answer 17

B

Question 18

Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent's debt-to-equity ratio?
A. 2.63
B. 0.52
C. 0.48
D. 1.08

Answer 18

D

Question 19

What is the formula for the current ratio?

Answer 19

Current assets / Current liabilities

Question 20

The following information was taken from Baxter Department Store's financial statements:
Inventory at Jan 1   $100,000
Inventory at Dec 31   $300,000
Net Sales   $2,000,000
Net purchases   $700,000
What was Baxter's inventory turnover for the year ending Dec 31?
A. 10
B. 3.5
C. 5
D. 2.5

Answer 20

D

You have to calculate COGS
Beg Inv $100,000
\+ Purchases
Goods available for sale
- Ending inv
Cost of goods sold $500,000

$500,000/$200,000 = 2.5

Question 21

Redwood Co.'s financial statements had the following at year end:
Cash $60,000
AR $180,000
Allowance for uncollectible accounts $8,000
Inventory $240,000
Short-term marketable securities $90,000
Prepaid rent $18,000
Current liabilities $400,000
Long-term Debt $220,000
What was Redwood's quick ratio?
A. 0.81 to 1
B. 0.94 to 1
C. 0.83 to 1
D. 1.46 to 1

Answer 21

A

Question 22

Calculate working capital

Answer 22

Total current assets less total current liabilities

Question 23

If at the end of Year 2, Hutton Inc. paid $100 of cash to buy $100 of inventory , what would be the effect on the following measures:
Working Capital Turnover Operating Cycle
A. No effect Increase
B. Increase Increase
C. No effect Decrease
D. Increase No effect

Answer 23

A

Question 24

Calculate net profit margin

Answer 24

Net income / Net sales

Question 25

Calculate return on total assets

Answer 25

Net income / Average total assets

Question 26

Calculate Dupont Return on assets

Answer 26

net profit margin x Total asset turnover

Net income/Net Sales x Net sales/Average total assets

Question 27

Calculate return on common equity

Answer 27

Net income - Preferred dividends / Average common equity

Question 28

If Hutton Inc. sold $100 of inventory for $100 of cash on Dec 31, Y2, which of the following ratios would decrease?
A. Net profit margin
B. Return on common equity
C. Working capital turnover
D. Return on total assets

Answer 28

A

The denominator would increase causing a decrease to net profit margin

Question 29

An increase in which of the following measures would generally be considered beneficial?
A. Debt-to-equity ratio
B. Operating cycle
C. Account receivable turnover in days
D. Times interest earned

Answer 29

D

Question 30

Times interest earned measures the ability of ____.

Answer 30

The company to cover interest charges. The greater the ability the less the risk of bankruptcy.

Question 31

If at the end of Year 2 Hutton Inc. borrowed $100 of cash by issuing a $100 long-term note payable, what would be the effect on the following ratios?
    Current Ratio  Debt-to-Assets Ratio
A. Decrease        Increase
B. Increase          Increase
C. No effect         Decrease
D. Increase         No effect

Answer 31

B

For the debt to assets ratio, increasing both the numerator and the denominator would increase the ratio

Question 32

Calculate times interest earned

Answer 32

Recurring income before taxes and interest / Interest

Don’t forget to add interest to the numerator!!!

Question 33

Calculate operating cash flow to total debt

Answer 33

Operating cash flow / Total debt